Problems connected TO amortization and tax norms

Lali Chagelishvili

Georgian tax law article XXV contains a rule on expense deduction and declaration of property loss. There are no rules on amortization expenses meeting international standards. We’ll try to turn your attention to very important issues connected with amortization.

Amortization (depreciation) is the technique of transforming basic materials into initial value price. The basis of accounting is initial value price of the product and the period of its exploitation.
In international practice amortization of basic materials is itemized in bookkeeping. Amortization is an expense not connected with money circulation. Money as a rule is spent on purchase of basic material and not for amortization extra charge. .
The property is amortized when in possess of the owner, is utilized to make profit and is amortized following norms and calculation rule stated by tax code to determine deducted money from the profit revenue
Amortized property is basic materials and non-material assets. Non material assets are intellectual property right, patent, trade mark, good will, computer program, license, right for lease agreement, franchise, right for natural resource exploration, special right on export and import, no money assets used in the process of production, distribution/service also for lease agreement or and administrative purposes.
Basic materials are material assets based on amortization, used by a person more than 1 year for production distribution/service, lease agreement or and administrative purposes.
Non-material asset expenses are deducted by means of amortization assignment, within the period of utilization in proportion with calculated period. If the period of the utilization of non material assets is not determined, the norm of amortization is determined by tax code article # 183, part 3, group 5 on amortization of basic materials. Nonmaterial assets are grouped separately.
The price of non-material assets based on amortization doesn’t include purchase and manufacture prices if they are already deducted when counting profit (revenue).
According to the tax code article 183, paragraph 2 – the following shall not be counted for amortization land, masterpieces, museum exhibit, historical units (but not building, constructions), labor, cattle and other non-amortized assets. Also materials valued up to 1000 Lari are not depreciated and they are fully deducted from the total revenue the accounting year it was purchased or produced.
New tax code different from the old one doesn’t cover the special rule of amortization on property transformed into preservation.
Tax regulation and book keeping uses initial, restored and remained price regarding basic materials. It’s essential that in book keeping in terms of basic material reevaluation the price for restoration (not initial price) be used to calculate amortization price
The evaluation of basic materials should be done regularly as when forming balance sheet its real price mustn’t be different from balance price.
The real price of basic materials is the market price after the reevaluation of the unit.
When basic materials are reevaluated by means of basis method and other factors (balance price increase or decrease) don’t exist, the unit must be described in terms of remained price when forming the balance sheet. But if the price of basic material is less than its balance price the difference shall be recorded as debit of other operation expense and basic materials in credit.
If real price of basic material exceeds balance price while forming balance sheet, the difference will be revenue – debit – basic materials and credit – other operational revenue.
With the reevaluating of basic materials the reevaluation of depreciation price must be done. This is done by proportional rule, namely the coefficient by the ratio of basic material real price and balance price is multiplied by the price of depreciation.
When discounting basic material balance price and its depreciation price, debit will be other operational expenses and depreciation of basic materials, credit will be basic materials (total amount of discount).
According to tax account the price of basic materials remains the same by the end of the year. Here we have difference depicted in different amortization assignments.
According to international standards of book keeping, amortization norms of depreciation can be different from those norms stated by tax legislation.
Following Georgian tax code article 183, item 3 basic materials based on amortization are grouped in accordance with norms of amortization. Specifically, first and second group basic materials with 20 % amortization , third group – basic materials with 8 % amortization s, fourth group – 5 % amortization, fifth group with 15 % amortization norm.
Each group amortization assignment amount is calculated by group balance sheet at the end of the year pursuing the norms of amortization of the present article – item 3.
Buildings and construction amortization will be assigned on each building separately. Each building is discussed as the separate group.
The rule of calculating group price balance is given in item 6 of this article. If in economic year the price of group basic material realization exceeds group price balance at the end of the year, the difference will be included in total revenue and group price balance will equal zero.
If group price balance is less than 1000 GEL at the end of the year, group balance price is the subject of deduction.
If all group basic materials are operated or liquidated, group amount balance price is the subject of deduction from the total revenue at the end of the year.
Tax payers have the right, to use accelerated amortization norm on second and third groups, but not double amount indicated in the norm of the item 3.
Basic materials received by leasing which is the subject of amortization, are grouped separately following the present article, part 3.
In industry units there is always difference in book keeping and deducted price from amortization revenue following observed data for tax regulation. This difference is kept on the account of “delayed tax assets” and “delayed profit tax”.
E.g. if total is 1000, subject – 1200, than > subject 200 – GEL compensation will occur in future and we’ll get tax asset.
Tax accounting > accounting. Tax accounting – 20 000; accounting – 15 000; in this case delayed tax asset is produced:
Debit – profit tax – 15 000
Debit – delayed tax asset – 5 000
Credit – profit tax to be paid – 20 000
If tax accounting < accounting. Tax accounting-1000; accounting – 1200 – liability has occurred. Debit – profit tax – 1200 Credit profit tax to be paid – 1000 Credit – delayed profit tax – 200 If there is difference between tax and book keeping data, text payer can make individual accounting according to property unit to be amortized.